CNBC-TV18 India talks to Kaushik Basu on Growth

Following is the trancscript of Kaushik Basu's interview with CNBC-TV18, India, which first appeared on www.moneycontrol.com[1].

In an interview to CNBC-TV18, Kaushik Basu, chief economist, World Bank said the growth situation has to be taken seriously. "I do believe that, for India, there has to be all focus on growth."

Despite the fact that compared to the rest of the world, India is doing well, he said, it has the potential to get right back to 8.5 percent growth. "We have to put all hands on growth and try to get it back again up as quickly as possible," he added.

Q:You have been appointed as World Bank’s chief economist. So, the view from the inside has now changed to the view from the outside, has not it?

A: A little bit. Three months ago, I moved from the heart of Indian policymaking to seeing it from outside.

Q: Perhaps the most immediate threat to policymakers in the government, right now, is the downgrade in rating. The government has undertaken a spate of reforms, but the economic and political paradigm has changed significantly, since you were here. How worried do you think the Indian government needs to be at this point in time?

A: You cannot dismiss the risk of a rating downgrade as unimportant. Whether one likes it or not, whether it is well founded or not, this is something that investors watch. So, it affects a country’s ability to function. Even the United States, when S&P’s did its downgrading, there were big global tremors felt by that. So, to that extent, you have to be careful.

You have to undertake policies, which are going to make it a remote possibility. I just feel India has taken steps. I have seen in recent times, which makes me feel, looking at it from outside, that if it continues to keep up this determination, this is a risk that will come and go and will not actually become a reality.

Q:Do you think the steps taken are enough? The government has been emphasising fiscal consolidation, 5.3 percent. But if you look at the roadmap, it does not seem credible enough. That is the concern that various investors, including rating agencies, have expressed. Do you find this roadmap credible? Also the Reserve Bank of India has not taken it seriously. There has been a public face-off between the current Finance Minister and the RBI Governor. What are your views on the trade-off between the growth and inflation dilemma?

A: The growth situation has to be taken seriously. But one has to keep in mind two things. Now sitting in Washington and looking at this, I am just acutely aware that while the growth has slowed down in India, doing a cross country comparison in the world, India still stands out as a rapidly growing country. There are, I would say, close to a 100 nations that to get a growth of 5 or 5.5 percent would do anything to get to that. India with a slowdown is sitting there. So, we must not overplay that.

At the same time, it is an emerging economy. A lot of people’s livelihoods, how well they do in life, what kind of jobs they get depend a lot on growth. So, I cannot get into the details of policy. I do not watch is at closely as I did till three months ago. But I do believe that, for India, there has to be all focus on growth. Despite the fact that compared to the rest of the world, we are doing well, India has the potential to get right back to 8.5 percent growth. So, we have to put all hands on growth and try to get it back again up as quickly as possible.

Q: Does that mean a cut in interest rates? What would your policy prescription?

A: There was a time, when I would get into these kinds of details. But I don’t look at it with that kind of a close scrutiny. So, I can’t give you a prescription as to what you do. All I will tell you is that it’s not going to be easy to get the growth back up there because the European crisis is continuing. There is some improvement in the financial sectors in Europe, but it is continuing.

By my own calculation, Europe will continue to feel some of the choppiness of the economic waters right up to the end of 2014 and 2015. During that time, the entire world will feel that. So, India will feel that. What policies India should undertake to keep all hands on growth? Three months ago, I would have given you a list of those. I will not do that now.

Q: Since you have spoken about the Euro zone, as we speak the leaders of the G20 are meeting in Mexico to discuss the Euro zone crisis. There are going to be huge repayments towards 2015-2016. The forecast is that Greek is running out of money by November 16, how do you see the Euro zone crisis playing out? Do you see a resolution? How do you see it impacting India in particular?

A: Just as in the US we talk of a fiscal cliff coming in December, for the Euro zone, there is a debt cliff which is going to come at the end of 2014 and 2015. That is the debt repayment cliff. Huge amounts will have to payback. Europe has injected liquidity very successfully, given the hard times, to prevent a collapse. But the injection of liquidity really buys time. What you do with that time that you have bought? That is critical. Europe is going through a very difficult phase there.

There is some improvement in the financial sector, which is making us feel that maybe the worst is over. But, no, I think there are two hard years ahead of us. The Euro zone countries will have to get together and make sure that when they are trying to repair the system, they must not also lean upon the poorer segments of the European population, countries like Greece and Portugal have lots of poor people and you don’t want to stall growth over there through wrong policies. You have to keep the growth up and gradually put the fiscal house in order. Again it’s a hard task, but they have bought themselves time through the injection of liquidity.

Q: With the pressure from Germany, it seems to be an impossible task because with the austerity we’ve seen growth suffer and it is likely to continue to suffer.

A: I think, yes, you are not going to see an improvement in the European scene, any dramatic improvement, certainly till early 2015. That is going to remain that way. IMF, which looks at this in much greater detail, will tell you something very similar. So, yes, I am not seeing an immediate redemption of where we are on the European situation. But Europe has to tackle that. While Europe tackles that, some of that heat will be felt in all emerging economies.

Q: Shifting focus to the US now, some economic data has picked up. You are seeing a rebound in home prices, some pick-up in consumption spending, increase lending by banks. However, the uncertainty over the fiscal cliff is key overhang at this point. How do you see this playing out? Do you see political consensus being built for a breakdown in the fiscal consolidation stalemate?

A: There are two things you have to understand about the fiscal cliff. The fiscal cliff is basically a correction of earlier taxes that you want to get back to the old more stable regime. So, it is not as if you don’t want to make these corrections. What you ideally want to do is not have a cliff like correction, but slow it down. I think, on that, across party lines in the United States, there is a feeling that you need to avoid that cliff immediately. So, to that extent, no matter who comes to power, I would expect that by December, there will be some remedial action so that the cliff is atleast softened up and it’s a slow correction that takes place in the United States.